2010–14 Portuguese financial crisis

The Great Recession in Portugal[1][2] led to the county being unable to repay or refinance its government debt without the assistance of third parties. To prevent an insolvency situation in the debt crisis Portugal applied for bail-out programs and has drawn a cumulated €79.0 billion (as of November 2014) from the International Monetary Fund (IMF), the European Financial Stabilisation Mechanism (EFSM), and the European Financial Stability Facility (EFSF).

Greece and Ireland also went into a debt crisis in 2010. Together these debt crisis of these three countries marked the start of the European sovereign debt crisis.

Causes

From 2005 to 2011, José Sócrates of the Socialist Party (PS) was the prime minister and the leader of the Portuguese Government.

Anxiety on financial markets

Prime Ministers Pedro Passos Coelho, from Portugal (left) and Rodriguez Zapatero, from Spain (right), in October 2011 - with economic downturn and a rising unemployment rate (over 10% unemployment rate in Portugal and 20% in Spain by 2011), the two countries of the Iberian Peninsula were trapped right in the middle of the European sovereign debt crisis.

After the financial crisis of 2007–2008, it was known in 2008–2009 that two Portuguese banks (Banco Português de Negócios (BPN) and Banco Privado Português (BPP)) had been accumulating losses for years due to bad investments, embezzlement and accounting fraud. The case of BPN was particularly serious because of its size, market share, and the political implications - Portugal's then current President, Cavaco Silva, and some of his political allies, maintained personal and business relationships with the bank and its CEO, who was eventually charged and arrested for fraud and other crimes.[3][4][5] In the grounds of avoiding a potentially serious financial crisis in the Portuguese economy, the Portuguese government decided to give them a bailout, eventually at a future loss to taxpayers.

In the opening weeks of 2010, renewed anxiety about the excessive levels of debt in some EU countries and, more generally, about the health of the Euro spread from Ireland and Greece to Portugal, Spain, and Italy. In 2010, PIIGS and PIGS acronyms were widely used by international bond analysts, academics, and the international economic press when referring to these underperforming economies. The PIIGS or PIGS acronym is largely responsible for the loss of trust of investors in the country.

Some senior German policy makers went as far as to say that emergency bailouts to Greece and future EU aid recipients should bring with it harsh penalties.[6]

Robert Fishman, in the New York Times article "Portugal's Unnecessary Bailout", points out that Portugal fell victim to successive waves of speculation by pressure from bond traders, rating agencies and speculators.[7] In the first quarter of 2010, before pressure from the markets, Portugal had one of the best rates of economic recovery in the EU. From the perspective of Portugal's industrial orders, exports, entrepreneurial innovation and high-school achievement, the country matched or even surpassed its neighbors in Western Europe.[7]

In the summer of 2010, Moody's Investors Service cut Portugal's sovereign bond rating down two notches from an Aa2 to an A1[8] Due to spending on economic stimuli, Portugal's debt had increased sharply compared to the gross domestic product. Moody noted that the rising debt would weigh heavily on the government's short-term finances.[9] It should be noted the concern of some in role of the rating agencies in aggravating the crisis Earlier in the year, Portugal was one of the countries identified in the 2010 Euro Crisis as concern spread over increasing government deficit and debt levels in certain countries.

Austerity measures amid increased pressure on government bonds

International financial markets compelled the Portuguese Government led by Prime Minister José Sócrates, to make radical changes in economic policy, like other European governments had done before. Thus, in September 2010, the Portuguese Government announced a fresh austerity package following other Eurozone partners, through a series of tax hikes and salary cuts for public servants. In 2009, the deficit had been 9.4 percent, one of the highest in the Eurozone and way above the European Union's Stability and Growth Pact three percent limit.

In November 2010, risk premiums on Portuguese bonds hit euro lifetime highs as investors and creditors worried that the country would fail to reign in its budget deficit and debt. The yield on the country's 10-year government bonds reached 7 percent – a level the Portuguese Finance Minister Fernando Teixeira dos Santos had previously said would require the country to seek financial help from international institutions. Also in 2010, the country reached a record high unemployment rate of nearly 11%, a figure not seen for over two decades, while the number of public servants remained very high.

On 23 March 2011, José Sócrates resigned following passage of a no confidence motion sponsored by all five opposition parties in parliament over spending cuts and tax increases.[10]

Economic Adjustment Programme for Portugal

Re-access to financial markets

A positive turning point in Portugal's strive to regain access to financial markets, was achieved on 3 October 2012, when the state managed to convert €3.76 billion of bonds with maturity in September 2013 (carrying a 3.10% yield) to new bonds with maturity in October 2015 (carrying a 5.12% yield). Before the bond exchange, the state had a total of €9.6 billion outstanding notes due in 2013, which according to the bailout plan should be renewed by the sale of new bonds on the market. As Portugal was already able to renew one-third of the outstanding bonds at a reasonable yield level, the market now expect the upcoming renewals in 2013 also to be conducted at reasonable yield levels. The bailout funding programme will run until June 2014, but at the same time require Portugal to regain a complete bond market access on September 2013. The recent sale of bonds with a 3-year maturity, was the first bond sale of the Portuguese state since requesting the bailout in April 2011, and the first step slowly to open up its governmental bond market again. Recently ECB announced they will be ready also to begin an additional support to Portugal with some yield-lowering bond purchases (OMTs), when the country regain complete market access.[11] All together this bodes well for a further decline of the governmental interest rates in Portugal, which on 30 January 2012 had a peak for the 10-year rate at 17.3% (after the rating agencies had cut the governments credit rating to "non-investment grade" -also referred to as "junk"),[12] and as of 24 November 2012 has been more than halved to only 7.9%.[13]

Portugal’s debt was in September 2012 forecasted by the Troika to peak at around 124% of GDP in 2014, followed by a firm downward trajectory after 2014. Previously the Troika had predicted it would peak at 118.5% of GDP in 2013, so the developments proved to be a bit worse than first anticipated, but the situation was described as fully sustainable and progressing well. As a result from the slightly worse economic circumstances, the country has been given one more year to reduce the budget deficit to a level below 3% of GDP, moving the target year from 2013 to 2014. The budget deficit for 2012 has been forecasted to end at 5%. The recession in the economy is now also projected to last until 2013, with GDP declining 3% in 2012 and 1% in 2013; followed by a return to positive real growth in 2014.[11]

See also

References